Diversify into Alternative Asset Classes with a Self-Directed IRA

If you opted out of alternative investments and Self-Directed IRA approaches in favor of just taking long positions in conventional IRA investments, 2018 was not your year. Equities have had a great run: The bull market that started in March of 2009 – when everyone hated stocks and blood was running in the streets – was the longest in U.S. history.

But every bull market ends, and as 2018 came to a close, we saw that the bear still has the power to seriously maul the unwary, uninformed and undiversified at any time.

This is why we have always been big believers in diversifying retirement investments into what investment professionals call “alternative” investments.

These are not necessarily exotic derivatives or highly-leveraged commodity positions – though these certainly have their place in an economy. Alternative investments are simply investments selected because they have a low historic correlation to the broad U.S. stock market – while still offering value and a reasonable expectation of a return commensurate with the risk.

No, we do not advocate the complete abandonment of long positions in conventional IRA assets like stocks, bonds and mutual funds. These are important building blocks for most individual portfolios, as they align with the general positive direction of the economy of the greatest country in the world.

But stocks are volatile by nature – as are many bonds, other than those on the very short end of the spectrum. Exposure to alternative asset classes can help add balance to your overall retirement portfolio, so that when the bears come to Wall Street, you have got a sizeable portion of your portfolio away from the bears, over on Main Street.

What are these alternative asset classes? There are thousands of possibilities, but here are just a few of the types of investments our own clients commonly hold within their own self-directed retirement accounts:

  • Rental real estate (both residential and commercial)
  • Hedge funds
  • Private equity
  • Gold and precious metals (select coins and bullion of consistent high purity – call us for details)
  • Closely-held corporations
  • Private debentures
  • Crowdfunding initiatives
  • Partnerships
  • LLCs
  • Tax liens and certificates
  • Land banking
  • Farm and ranch land
  • Mortgage lending
  • Private lending
  • Trust deeds
  • Property flipping
  • Structured settlements

Setting up a Self-Directed IRA with American IRA makes it easy for you to make these investments, gaining valuable diversification for your portfolio, while still retaining the benefits of tax-advantaged retirement accounts.

For example, if you are concerned about current income tax rates or paying capital gains taxes on highly-appreciated stock, you can do so using a Self-Directed IRA or Roth IRA without having to worry about current tax liability

Note: There are some exceptions to this favorable tax treatment if you are employing leverage within a Self-Directed IRA or other retirement investment – if you hold a mortgage or other debt within an IRA, you may be liable for unrelated debt-financed income tax on the portion of any gains or income attributable to money you borrowed, but not to those attributable to your own money. For more information, contact your tax professional).

American IRA can help you set up either a traditional or Roth IRA, or both, for your retirement portfolio. These can hold new contributions, or you can roll funds into a self-directed Traditional IRA from 401(K) accounts or other IRAs.

Many of our clients who are self- employed or who own their own corporations or LLCs establish self-directed Solo 401(K)s, Self-Directed SIMPLE IRAs or Self-Directed SEP IRAs for their own businesses. Again, contact us for more information on which of these small business retirement plan account types my best fit your personal situation.

Investors should remember that many of these investments have low liquidity. They may not be appropriate for those who may have a short-term need to access the cash. Many of the best long-term opportunities may require you to tie up the cash for a number of years.

Prohibited investments.

The law allows tremendous flexibility in selecting investments for Self-Directed IRAs and other retirement accounts. However, there are a few investments that are actually prohibited by law:

  • Life insurance
  • Jewelry and gems
  • Collectibles such as art, oriental rugs and antiques
  • Alcoholic beverages
  • Coins and bullion of insufficient or inconsistent purity.

The bull market is not going to go on forever. If past is prelude, as the great mutual fund innovator John C. Bogle is fond of saying, we are long due for a serious market correction. When it arrives, you want to be as diversified into many different asset classes as possible, to minimize your risk exposure.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

6 Tips for Taking Distributions from your Self-Directed IRA

You might believe that finding the best way to accumulate funds for retirement is difficult. Well, guess what? Withdrawing those funds is just as hard–if not harder–if you want to do it in a tax-savvy way. Failure to meet this challenge could result in you losing over half of your retirement money to income, estate, and state taxes.

Taking your distributions too early or failing to take the required distributions from your traditional Self-Directed IRA are the two most common and costly mistakes that retirement savers make. Here are seven tips to help you avoid financial disaster:

  1. Taking money from your Self-Directed IRA too soon can be expensive

Even though you are allowed to take distributions from your traditional Self-Directed IRA at any time, you almost always need to be 59½ years old to avoid a 10 percent early withdrawal penalty. And that penalty is in addition to the income taxes you will owe.

There are, however, some exceptions that will waive the penalty:

  • You become disabled
  • You have medical expenses that are greater than 10 percent of your adjusted gross income
  • You use the money for qualified education expenses
  • You convert your Traditional IRA to a Roth IRA
  • You purchase your first house with the funds
  • If you die, the balance in your Self-Directed IRA account is paid to your beneficiary without penalty

There are other exceptions, so talk to your accountant to make sure that you qualify.

  1. Become familiar with the rules for Required Minimum Distributions (RMD)

You must take your first RMD by April 1st of the year after you turn 70 ½. So, if you turned 70 ½ in 2018, you have until April 1st of 2019 to make your initial withdrawal. From then on, you have until December 31st.  Do not take this rule lightly: The penalty for missing the deadline or taking out less than the required amount is a heart-stopping 50 percent excise tax!

  1. You will probably be using the Uniform Lifetime Table to calculate your RMD

Unless your spouse is more than ten years younger than you are, you will be using the IRS’s Uniform Lifetime Table to determine your withdrawals. Remember, these are the minimum amounts you must withdraw. You can always take more.

If you have IRAs at several institutions, it doesn’t matter from which of these you take the distributions, as long as all of them add up to the required amount. That’s why it’s essential that you know your RMD numbers, so there is no confusion when multiple institutions hold your accounts.

  1. Your RMD could be smaller if your spouse is significantly younger

If your spouse is more than ten years younger than you, the Joint Life and Last Survivor Table will allow you to make smaller RMD withdrawals. For example, a retiree turning 70 ½ this year and makes his first withdrawal next April will have a life expectancy of 26 ½ years. If, however, he had a 56-year-old wife, their joint life expectancy would jump to over 30 years, and their annual RMD would fall from about $7,550 to $6,650 on a $200,000 account.

  1. Consider a Roth IRA

The beauty of the Roth is that you are not taxed on withdrawals and are not required to take minimum distributions. If you own a Traditional IRA, it might make sense to convert to a Roth, but do not do it without consulting a tax advisor. Depending on your age and the goals you have for your retirement funds, it may not be your best move.

  1. You are allowed to make “in-kind” withdrawals from your Self-Directed IRA

Maybe you have some assets in your Self-Directed IRA that you prefer to keep. In-kind distributions make it possible for you to move these assets into a taxable account without first turning them into cash. The assets are assigned a fair market value when they are moved and will count toward your RMD.

Let us help you reach your retirement goals

At American IRA, we believe that Self-Directed IRAs are the best vehicles for growing your retirement account. And we have the experience to handle your transactions, no matter which direction you choose to go with it.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Advantages of Self-Directed IRA Investing

Doing at least part of your long-term investing using a Self-Directed IRA has a number of important advantages:

Opportunity for diversification. Most off-the-shelf retirement plans offered by Wall Street investment companies do not provide a way for you to access anything beyond stocks, bonds, funds and cash products. Some may offer annuities, but they are all run-of-the-mill financial products that generate a commission or income stream for the investment company.

A Self-Directed IRA lets you hold any of the above conventional retirement account asset classes, if you choose, but also lets you add a variety of alternative asset classes to your retirement portfolio:

  • Direct ownership of real estate
  • Tax liens and certificates
  • Private lending
  • Certain gold coins and bullion
  • Closely-held C corporations, partnerships and LLCs
  • Farms and ranches
  • Lumber
  • Oil, gas and minerals.
  • Mortgage notes
  • Promissory notes and debentures
  • Private equity
  • Private debt placements
  • Venture capital
  • Angel investing

And much more. Each of these different types of assets can help you improve the risk-adjusted return potential of your portfolio.

Including alternative asset classes like these in your retirement portfolio is particularly effective since the correlation between these investments and the general stock or bond market tends to be relatively low.

Tax advantages of Self-Directed IRAs

If you choose a traditional Self-Directed IRA, or another tax-deferred vehicle that allows you to self-direct, such as a Self-Directed Solo 401(K), Self-Directed SEP IRA, Self-Directed SIMPLE IRA, Self-Directed CESA or even a Self-Directed HSA, your contributions are generally pre-tax, provided you meet certain income limits and requirements, and they grow tax-deferred until you take them out – normally in retirement.

If you choose a Self-Directed Roth IRA, or if you contribute to a Roth account within a Self-Directed 401(K), your contributions are after tax, but they grow tax-free, and you can take distributions in retirement both tax and penalty-free after age 59½, provided you kept the assets in your Roth account for at least five years.

Asset protection

Federal law and most state laws provide significant asset protection benefits to IRAs, including Self-Directed IRAs. This also extends to Self-Directed Solo 401(K)s, Self-Directed SEP IRAs and other forms of retirement accounts serviced by American IRA, LLC.

Courts generally protect assets in Self-Directed IRAs and other retirement accounts against the claims of creditors in lawsuits and in bankruptcy proceedings – especially if you fund the Self-Directed IRAs and other retirement accounts with your own money, as opposed to an IRA you inherited. This means if you file bankruptcy, creditors will generally not be able to place claims on your retirement accounts.

Specifics vary by state, so speak with an attorney licensed in your state for details.

Intergenerational planning

With careful planning, investors can use Self-Directed IRAs and 401(K) plans to pass assets on to future generations with very significant tax advantages, including the ability to “stretch” tax free Roth IRA or Roth 401(K) growth over the entire lifetime of a very young heir – an extremely important financial tax advantages, particularly if the heir has many decades of life expectancy in front of him or her.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Self-Directed IRA Investors Benefit as Fed Knocks the Wind out of Stocks

In a widely-anticipated development, the Federal Reserve elected to increase interest rates for the fourth time this year. Alan Greenspan advised investors to head for the proverbial hills, but the selloffs began well before the rate hike as traders built their assumptions around the increasing certainty of the hike, and around some reduced assumptions about economic growth rates thanks to the Federal Reserve tapping the brakes on the economy. Which turned out fine for alternative investment fans and Self-Directed IRA owners.

The yield curve is starting to writhe sideways, with three-year treasury yields exceeding the yields on five-year treasuries as of Monday, December 17th. An inverted yield curve is a traditional harbinger of a looming recession, though the sign is not terribly bearish until the 3-year rate gets higher than the 10-year rate, and we are not there yet. But the gap between short-term and long-term yields, fell to just 13 basis points between the two- and 10-year Treasury yields late last week – which creates a tough environment for banks and other lenders trying to make money, since that whole model requires them to pay low rates borrowing short so they can earn high rates long.

However, the decline in treasury rates all along the spectrum in recent days tells us that we are seeing a substantial migration of assets to perceived safety, as institutional investors move out of stocks and into historically less volatile assets – including assets that are frequently held by Self-Directed IRA investors: Mortgages, real estate assets and hedge funds.

The overall sentiment is one of increasing pessimism over prospects for economic growth. “The biggest theme developing is that you are going to have significantly weaker growth, near recession-level growth in 2019, based on our measures, and the markets are generally not pricing that in,” said Greg Jensen, the co-chief investment officer of Bridgewater Associates to Reuters editors on December 20th. Jensen is expecting 2019 economic growth of just 1% – not even enough to outpace inflation rates. Meanwhile, the Federal Reserve revised its 2019 growth expectations from 2.5 to 2.3 percent.

The Fed’s inflation projection was also reduced, from 2.1 percent inflation in 2018 to 1.9 percent.

Will we see the kind of meltdown we saw in 2008? That’s not likely. A decade ago, the economy was leveraged to absurd levels. We have a much healthier foundation now across all asset classes than we did at the time of the 2008 financial crisis. But we do expect corporate earnings around the world will see significant shortfalls against projections made only recently. Other people see that too, which is, of course, why we saw a big pullback in stock prices this week.

So, what’s the best course of action going forward? As always, we are big fans of diversification, including diversification into alternative asset classes – particularly where the investor has specific industry knowledge that can be leveraged into a real market trading advantage over other participants. We also encourage healthy allocations into precious metals, real estate, private lending portfolios and other investments in or closely related to tangible assets.

If the 2009-2017 bull market in stocks left you dangerously overexposed, it is not too late to roll back and move assets over to Self-Directed IRAs. There is still some room for stocks to fall, despite the lousy third week of December 2018, and there’s still ample room for less glamorous asset classes to have a good run, especially as the economy slows down and more investors move assets toward alternatives and safe havens.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

With S&P Earnings Yields Low, Now’s the Time to Diversify Using a Self-Directed IRA

It’s up! It’s down! It’s all around! The last couple of weeks on the stock market has been entertaining, if nothing else. But it is easy to maintain a healthy perspective on stock market volatility if one’s own retirement prospects are not hanging in the balance with every sickening swing in prices. And this underscores the value proposition of Self-Directed IRA investing and alternative asset classes: Diversify enough, and you do not have to worry much about it.

On December 26th, 2018, the stock market as measured by the Dow Jones Industrial Average rose by more than a thousand points – logging its biggest single-day increase in history.

But just days before, the Dow logged one of its biggest single-day losses.

And it does not matter. What matters is this: Over the past ten years, the S&P 500 has delivered an annualized return of more than 14 percent. It is delivered nine positive years in a row, prior to 2018. As of this writing, 2018 will see U.S. large cap stocks finish underwater by about 7 percent, barring any major market moves in the next few days.

The 7 percent loss we will probably have for 2018, and the big single day moves over the last few weeks are healthy reminders: The market is risky. The market did not suddenly become risky: The market was risky all along!

And, paradoxically, stock markets are riskiest precisely when they appear the safest. That’s when stock prices get bid up the most.

Self-Directed IRAs Help You Get Off the Volatility Wagon

But large-cap U.S. stocks – the ones measured by the Dow Jones Industrial Average (which is a very narrow reading of just 30 ultra-big companies) and the S&P 500 appear to have outstripped earnings by a large margin: Stock prices increased by about 14 percent per year, but earnings did not increase that much: The trailing price-to-earnings ratio for the S&P 500 is 18.7 percent. Not crazy high, by any standard, but certainly toward the top of its long-term historical range, discounting some more recent outlying circumstances.

Price-Earnings Ratio, S&P 500 Index.

Source: Multpl.com.

Now, let’s look at this a different way: What is the earnings yield for U.S. large cap stocks, and what’s been the trend?

Earnings Yield Is What Counts – In or Out of Self-Directed IRAs

Earnings yield is what really counts – it is what real estate investors try to predict when they determine cap rates on investment properties, it is something all equity investors should be taking a look at no matter what the asset class is: The total all-in net earnings, divided by the stock price.

Currently, the earnings yield on the S&P 500 is 5.29%. That’s the return investors can expect going forward, if there are no changes in P/E multiples.

S&P 500 Earnings Yield, as of 26 December 2018

Source: Multpl.com

As you can easily see from the historic earnings yield chart, the 5.29 earnings yield figure is towards the bottom of its historic range, with the exception of the 2008 recession and the days following the burst of the dot.com

Subtract investment expenses from that – expense ratios, 12(b)1 fees, bid/ask spreads and commissions – and that looks a lot more like 4 to 4.5%.

Well, that’s ok, in the long run. But in the short run, you are still facing an awful lot of volatility in stocks: A market that can gain 1000 points in a single day, as it did yesterday, can lose them just as easily. And a market that lost 35 percent in 2008 can do it again in 2019, no problem.

A net earnings yield after expenses of 4 to 4.5 percent is not enough compensation, given the very real risks, to justify an outsize concentration in stock mutual funds and ETFs for most people. Not when there are a number of other asset classes that can generate similar returns with lower historic levels of volatility. That’s essentially bonds territory. Banks are lending on houses at that rate – and getting the security of real estate in the process.

A self-directed retirement account allows you to quickly and efficiently spread your assets out over several unrelated types of assets – many of which have similar earnings yields or expected returns and lower or equivalent levels of volatility. Even more have similar expected earnings and similar volatility levels, but they tend not to fall at the same time as stocks.

When you hold volatile assets in combination in your portfolio, the volatility of the multiple asset classes, constantly pulling in different directions, tends to even out. When stocks zig, real estate, private lending, precious metals or other alternative asset classes zag. The overall volatility of the portfolio tends to cancel out, but you still get the benefit of earnings in each asset class over time.

Self-Directed IRAs let you diversify away from stocks and into:

  • Direct real estate ownership and rental
  • Oil and gas
  • Partnerships
  • Tax liens and certificates
  • Farms and ranches
  • Timber and minerals
  • Closely-held corporations
  • LLCs
  • Private lending
  • Mortgages
  • Venture capital
  • Private debt placement
  • Private equity
  • Hedge funds
  • Crypto assets

And many others.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

30 New Year’s Resolutions for Self-Directed IRA Owners

As 2018 has come to a close, it is time for Self-Directed IRA investors to lay out a track to run on for 2019 – and ensure everything goes to plan as much as markets will allow.

This means taking some concrete actions, both within your Self-Directed IRAs, in your retirement accounts, and from a financial planning perspective in general.

Here is a modest list of productive New Year’s resolutions that nearly any Self-Directed IRA investor (or anyone who’s interested) can accomplish:

1.)  Review and update your beneficiaries on all Self-Directed IRAs and all other retirement accounts, life insurance policies and annuities.

2.)  Ensure that each account has both a primary and secondary beneficiary identified by name.

3.)  Ensure that where there are multiple beneficiaries on any one account, that each beneficiary’s share is precisely defined.

4.)  My attorney or financial advisor will have a copy of my beneficiary forms in his or her files.

5.)  Finish funding your emergency fund – up to 3 to 6 months of estimated monthly household expenses.

6.)  Complete or update your Last Will and Testament, updated to account for major new assets and investments, specific heirlooms and other properties of significant interest to family members,         and reviewed for changes in familial status.

7.)  Maximize allowable IRA and Self-Directed SEP IRA contributions for 2018 by April 15th, 2019.

8.)  Complete a living will or health care directive, as well as springing power of attorney documents that enable family members to take action on your behalf in the event you are incapacitated.

9.)  Complete a life insurance review and purchase amounts necessary to protect your family against the unexpected death of a breadwinner.

10.)  Contribute the maximum allowable for 2019 in various retirement accounts – either in a lump sum by _____ date, or by setting automatic monthly contributions to hit the maximum level               (given your income and eligibility).

11.)  Take advantage of tax loss harvesting opportunities.

12.)  Contribute enough to your 401(k) to get the full employer match.

13.)  Open a Self-Directed SEP IRA, Solo 401(K) or Self-Directed SIMPLE IRA account, as appropriate, to maximize tax-advantaged retirement savings opportunities and maximize potential for               self-directed retirement investing.

14.)  Set up your basic monthly household expenses.

15.)  Purchase _____ new properties for your Self-Directed Real Estate IRA.

16.)  Eliminate personal debt outside of a mortgage.

17.)  Purchase disability insurance sufficient to protect your family against a devastating loss of your income if you should become unable to work

18.)  Meet with your accountant mid-year and not just before April 15th.

19.)  Check your credit score for errors at annualcreditreport.com.

20.)  Minimize your exposure to high assets-under-management (AUM) fees and expense ratios by moving long-term retirement holdings to American IRA, LLC, where you only pay fees on actual            transactions, rather than paying a percentage to a custodian to do next to nothing every month but send you a statement.

21.)  Diversify into more investment asset classes, including alternative asset classes such as precious metals, tax liens and certificates, direct ownership of investment real estate, REITs, private               lending, hedge funds (if you are an accredited investor), private debt and equity placements, closely-held companies, oil and gas opportunities, LLCs and limited partnerships.

22.)  Double-check your Social Security projections. You should get a letter from the Social Security Administration around your birthday.

23.)  Bank or invest all windfalls, or pay off high-interest debts, such as credit cards.

24.)  Increase your savings and investment levels compared to last year.

25.)  Cancel useless subscriptions and use the savings to pay down debt or invest for retirement.

26.)  Open or contribute to a Coverdell education savings account (possibly including a Self-Directed CESA) or a Section 529 plan for your children or another family member under age 18.

27.)  Complete a business succession plan, to include buy-sell agreements and if necessary, adequate life insurance in place to fund these plans.

28.)  Complete and execute a disaster recovery plan for your business.

29.)  Inventory household valuables and ensure you have adequate insurance to cover the contents.

30.)  Update property insurance to cover the replacement value or adjust savings to cover the risk if you cannot afford the premiums for doing so.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

How to Keep Your Self-Directed IRA Assets from Going Through Probate

Probate is a long, frustrating and expensive process. It takes time for court probate officials to notify and sort through all the potential creditors’ claims, deal with unpaid tax liability and track down all the heirs. It is expensive, too: All these court officials and clerks need to be paid, and with probate costs sometimes consuming up to 8 percent of your assets and more. But when it comes to IRAs, Self-Directed IRAs and other kinds of retirement accounts, there is good news: Probate is entirely voluntary. There is an easy and straightforward way for you to keep your Self-Directed IRAs, 401(K)s, Self-Directed SEP IRAs, Self-Directed SIMPLE IRAs and other tax-advantage investments out of probate and pass them directly to your heirs:

Designate beneficiaries by name.

When you name a designated beneficiary on a Self-Directed IRA or other retirement account, the assets in that Self-Directed IRA do not go through probate. They bypass probate law and go directly to the designated beneficiary under contract law, which is much more straightforward.

Creditors do not get to intercept the money, probate attorneys do not get to subtract their 3 to 8 percent, there are no taxes at the federal level, and the money passes to heirs in days, not months.

If you fail to designate a named beneficiary, the process is very different. First, the court will consider any Self-Directed IRAs or other retirement accounts for which you did not name a beneficiary to be part of your estate. As such, it will go through probate, and the attorneys, accountants, clerks and judges will each take their cut. Then the IRS and state revenue agencies will subtract their piece from what’s left over.

Then probate officials will subtract any money owed to any creditors who come forward out of what’s left over.

Often there is little, or nothing left over for heirs who are not named beneficiaries on your IRAs, Self-Directed IRAs and other retirement accounts.

Note: Simply writing a will does not avoid probate. A will can simplify the process of determining who is entitled to inherit what assets, and will generally overrule the state intestate laws, which are a series of defaults that courts must observe when someone dies without a will. But assets in wills still go through the probate process, unless you have named a designated beneficiary in writing.

In addition to named beneficiaries on your Self-Directed IRAs and other retirement accounts, you should also consider naming beneficiaries on your bank and brokerage accounts, annuities, pension plans and life insurance policies.

It is also important to revisit your beneficiaries every so often and make sure the beneficiaries on these documents still reflect your wishes.

If you are holding your investments with American IRA, LLC, naming your beneficiaries is very easy: Just contact us at the below phone number or website, or download the Change of Beneficiary Form from our site.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Self-Directed IRAs, Correlation and Diversification

One of the key advantages of Self-Directed IRA investing is its tremendous flexibility: While retaining all the tax advantages of using conventional IRA accounts, self-directed investing also allows investors to range far and wide in search of assets that would effectively diversify against the behavior of a retirement portfolio that’s heavy on U.S. large cap stocks (think the S&P 500) and U.S. investment grade bonds that dominate most Americans’ retirement accounts.

Now’s the time to consider diversifying into a Self-Directed IRA.

That’s important today, as stocks continue to flirt with all-time highs (though in recent days, as of this writing, we have seen some significant downside volatility starting to show up in the stock market), and as interest rates continue to rise. Both portend danger ahead for those investing primarily in Wall Street paper assets. If you are not already diversified into other types of asset classes, now would be a good time to consider making some moves.

Conventional diversification measures and asset allocation is getting less effective over time.

Buying international stocks is no longer the diversifier it once was. During the 80s, the correlation coefficient between international and U.S. stocks was less than 0.50. That is, international stocks offered a meaningful way to maintain exposure to the long-term expected returns, while even a small addition of these more volatile assets could help offset the short-term volatility of the S&P 500.

But much of that diversification benefit for international stocks has vanished: Since 2000, the correlation coefficient of international vs. U.S. equities has increased to more than 0.87 through the end of 2016.

Investors looking for substantial diversification against the S&P 500 must get more creative.

According to this matrix from Morningstar, the most effective diversifiers against the performance of U.S. large cap stocks are cash (with an only slightly positive correlation coefficient of 0.052), commodities (0.141), U.S. investment grade bonds (0.230), emerging markets stocks (0.537) and real estate (0.588).

But cash tends to get swamped by inflation, bonds are getting drowned by a rising tide of interest rates in the short-term, and commodity investing is not palatable to most people, except as an inflation hedge.

Self-Directed IRAs Allow for Easy Diversification

Self-Directed IRA investing allows investors to take a much more granular approach to asset allocation and invest with a rifle scope approach rather than a scatter shot approach that most investors limited to fund and index investing must take.

This means that Self-Directed IRA investors can commit retirement funds to investments that are, from a diversification point of view, literally “off the chart.”

A REIT fund would likely behave very much like the real estate asset class as a whole, unless it was carefully targeted at a specific niche market. But any given rental property can behave radically differently from a REIT index, simply because so much of real estate investing is governed by hyperlocal trends, local employers, schools, tourism factors, seasonality and, of course, the investor’s own effort and skill in unlocking value in a closely-managed rental property.

Investments in tax liens and certificates would likely tend to generate positive returns even in falling interest rate markets – and therefore be an effective diversifier.

Self-Directed IRAs and Alternative Asset Classes

Both of these assets lend themselves very well to Self-Directed IRA investing – they are easily managed using a third-party administrator like American IRA, LLC, and investors can exercise very close control of these transactions without having to leave the decisions up to a money manager many hundreds of miles away.

This home court advantage can be invaluable for investors – and can be had without paying crazy ‘2-and-20’ fees to hedge fund managers.

In fact, due to the nature of the Self-Directed IRA market, American IRA is able to forego the inefficient expense ratio/AUM fee pricing model and charge a low flat fee for each transaction. In many cases, this saves hundreds and even thousands of dollars per year – especially on larger accounts.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Due Diligence on Self-Directed IRA Advisors

Fortunately, the vast majority of our colleagues in the Self-Directed IRA industry are honest and are out to do the right thing by investors. So, on the rare occasions when we do become aware of scams affecting Self-Directed IRA investors, it is no fun writing it up. But we believe all investors in the Self-Directed IRA space have a right and a need to know about them.

Here is an episode that came to light earlier this year, which underscores the need for investors to conduct proper due diligence on anyone advising them on their Self-Directed IRAs: Perry Santillo, the founder and CEO of Baltimore-based High Point Wealth Management and co-host of a popular radio broadcast called The Money Guys, has been found guilty of soliciting at least 99 investors, convincing them to sell annuities and other assets in their existing retirement accounts, and roll the proceeds over to a Self-Directed IRA.

There’s nothing inherently wrong with that, so far – provided the new investments meet the suitability standard expected of financial advisors, and that it is a bona fide financial advisor making the recommendation.

But once the rollover was in place, the State of Maryland says Santillo steered those investments into promissory notes for his other companies and those of an associate.

This is a blatant conflict of interest. At American IRA we do not attempt to steer clients in or out of any legal investment. The High Point Capital case underscores the very real danger a conflict of interest poses when an administrator or custodian is also acting as a financial advisor and has side business interests that present a temptation to steer investor’s assets to serve their own interests, instead of those of their clients.

Neither Santillo nor his firm were registered with the State of Maryland as financial advisors, and so should not have been providing specific investment advice at all. Furthermore, neither Santillo nor his firm were registered with the State of Maryland as financial advisors, and so should not have been providing specific investment advice at all.

According to court filings, Santillo and his staff at High Point Capital improperly steered at least $6,290,000 of their clients’ money into his other firms’ coffers via unsecured promissory notes. What’s more, he named himself as an “interested party” on the transfer forms.

Their transfer forms also did not include disclosures required by law that would have alerted investors to potential red flags.

The Maryland Commissioner ruled that in promoting his own interests under the guise of advising clients about their Self-Directed IRA investments, Santillo committed the following violations:

  • Offering and selling unregistered securities.
  • Improperly holding himself and his firm out as a financial advisor and appropriating the term “wealth management.”
  • Recommending that advisory clients sell securities and invest in pooled real estate investments and/or promissory notes.
  • Employing or associating with unregistered investment adviser representatives.
  • By effecting or attempting to effect securities transactions in pooled real estate investments and/or promissory notes while they were not registered with the Division as a broker-dealer or agent.
  • Offering and selling unregistered, non-exempt securities that are not federal covered securities to at least 21 investors, and by failing to disclose to those investors the risks associated with the securities, including that the FNS promissory notes are unsecured.
  • Failing to disclose the risks of the unregistered securities they were improperly selling.
  • Misrepresenting the investment track record of the unregistered securities they were improperly selling.
  • Convincing clients to sell annuities and incur material surrender charges without informing them what they recommended as a replacement.
  • Failing to disclose material conflicts of interest.

…and many others.

As a result of these violations, Santillo and his corporations were fined $3.99 million, plus an additional $430,000 for Santillo and FNS, and permanently barred from the securities industry in Maryland.

As a third-party administrator of Self-Directed IRAs and other retirement accounts, we have no conflict of interest that would lead us to steer investments to other investments that we control. We are investment neutral, and we do not give recommendations to buy or sell any given security or other investment. Instead, we work with your existing financial advisors, and simply execute the transactions that you direct, while in many cases saving thousands of dollars in AUM fees and expense ratios, thanks to our unique menu-based pricing structure.

However, as this incident shows, you should do your own due diligence on any advisors you choose to engage. Look into their backgrounds with state securities regulators and with FINRA, understand the required disclosures on any given transaction, and insist on frankness and transparency when it comes to any potential conflicts of interest.

To read the entire ruling, click here.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Explaining the Self-Directed IRA Single Rollover Rule

A couple of years ago a lot of Self-Directed IRA owners and even advisors believed believed you could execute an IRA rollover once per year for every account. But that is not the case. The fact is that Self-Directed IRA owners can only execute one IRA rollover per year per taxpayer. If you blow that rule and attempt to take multiple rollovers, you could face serious tax consequences: Including the loss of retirement savings.

Worse, the IRS does not provide any remedy for avoiding the penalty once the prohibited rollover happens. There’s no ‘take-backs’ or do-overs.

Here’s the rule:

You can make only one rollover from a Self-Directed IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own (Announcement  2014-15 and Announcement 2014-32). The limit will apply by aggregating all of an individual’s IRAs, including Self-Directed SEP IRAs and Self-Directed SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit.

  • Trustee-to-trustee transfers between IRAs are not limited.
  • Rollovers from traditional to Roth IRAs (“conversions”) are not limited.

If you withdraw funds from an IRA or Self-Directed IRA thinking you are going to roll the funds over to another IRA, and you later learn that you are ineligible because you already did your one allowable rollover for the year, you are facing a taxable distribution of the entire IRA.

That is, you will not even have the Self-Directed IRA by the time the IRS done with you, and you will probably be looking at a big tax bill – especially if the IRA was something other than a non-deductible IRA.

To add insult to injury, if you are under age 59 ½, you are also facing a 10 percent early distribution penalty on the entire pre-tax account.

That is right: You do not pay a 10 percent penalty on the amount you get to keep after taxes; you must pay the ten percent on the full gross (pre-tax) amount distributed.

Wait… it gets even worse.

If, having taken a prohibited distribution, you try to deposit the funds into a new Self-Directed IRA or conventional IRA account thinking you are just going to do a normal rollover, you will instead have an excess IRA contribution on your hands, with a whole new layer of penalties.

The IRS can occasionally cut some slack on the 60-day rule. But Congress gave no waiver authority to the IRS when it comes to the single rollover rule. Do not bother trying to appeal it: The IRS is simply not allowed to bend the rules on this one.

To avoid the penalty, do not get involved. You can still make multiple rollovers as long as you use the trustee-to-trustee method, in which you transfer assets directly from one administrator or custodian to another, and do not attempt to take possession of the funds using a 60-day rollover.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.